- Every penny matters.
- Everyone has to earn his or her keep and add value.
- Appreciation of the asset is the driver.
- No excuses for failure.
- Set goals high and achieve them.
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When you lease a car, you are paying rent for it--a set fee each month for the use of the car. At the end of the lease term, you give the car back to the leasing company and own nothing. As a general rule, leasing a car instead of buying it makes economic sense only if you absolutely must have a new car every two or three years and drive no more than 12,000 to 15,000 miles per year. If you drive more than 15,000 miles a year, leasing becomes an economic disaster because it penalizes you for higher mileage.
There are numerous financial calculators available on the Internet that can help you determine how much it will cost to lease a car compared to buying one. Be careful when you use these calculators--they are designed based on certain assumptions, and different calculators can give different answers. For a detailed consumer guide to auto leasing created by the Federal Reserve Board, go to the Board's website at www.federalreserve.gov/pubs/leasing.
For more information on deducting car and local travel expenses, see Deduct It! Lower Your Small Business Taxes, by Stephen Fishman (Nolo).
4. Concentrate your sales efforts on what's profitable.
There are two ways to make sure your marketing dollars and sales efforts are put to the best use: focus on selling (1) more of your bestsellers and (2) products or services with the highest profit margin.
Too many business owners ignore their bestsellers because they're selling well, and instead pour energy into marketing products or services that don't sell well, hoping to raise sales on these items too. It makes much more sense to concentrate your efforts on what your customers and the market have already told you--they want your bestsellers.
As to margins, in case you're not familiar with the concept, profit margin measures the difference between the costs of producing a product or providing a service and what you're selling it for. In other words, it lets you know what your return is on the money you pay out to buy or produce goods or to provide services.
To determine your profit margin, you divide your profit on an item by its sale price. For example, say an extermination service costs the customer $100, but the exterminator spends only $45 to provide it. The exterminator's profit is $55, so the profit margin is 55% ($55 divided by $100). If you have a margin of 55%, you know you will get to keep 55 cents of every sales dollar you take in (before paying for overhead).
If you regularly calculate your profit margins, you can monitor the profitability of your products or services. A decrease in profit margin often means that your costs have gone up--costs for inventory, supplies, or labor. This should nudge you to look for new suppliers, lower your labor costs, or raise your prices. If you're discounting products and services, it's especially important to keep track of your margin. You need to make sure that your costs for inventory and supplies, or your time or labor costs, aren't eating up your profit margin or even putting you into the negative on a sale.
Another way to use profit margins is in screening new products and services to sell. For instance, if you run a retail gift shop, you might decide to sell products only that can be bought and sold at a price that yields a profit margin of 50%. This will prevent you from taking on inventory that you'll eventually lose money on.
Once you figure out your profit margin on each product or service you offer, you can concentrate your sales efforts on those with the highest margin, which will let you keep more money from each dollar of goods or services that you sell.
And if you haven't already, pump your revenue and expense numbers into a profit/loss forecast to help you see the big picture: how many products or services do you need to sell each month, and for how many dollars, to cover your expenses and earn some kind of profit as well?
2. Improve your cash flow.
Having enough cash flow to pay your bills can include spending less (cutting overhead and office expenses, reducing employees' hours or benefits, moving to a cheaper location, or selling pricey equipment) and bringing in more cash (giving a discount for prompt payment, stepping up your collection efforts, or getting customers to help you get rid of some inventory).
A recent article on about.com had some good ideas on improving cash flow and collecting accounts receivable faster:
- Don't wait until the end of the month to send invoices.
- Ask for partial payments (break a job up into phases so you can bill earlier).
- Give your customers or clients a discount for paying early.
- Make calls on accounts receivable regularly.
- Pay bills only when they're due.
This last one I agree with only to an extent. As I talked about in a prior post, if you're not hurting for cash, paying a bill a few days early can benefit you in several ways, even if you don't get a discount.
Who can pay their bills on time right now, especially when your customers or clients aren't paying you on time? But if you can pay your bills on time, it can save you money and help you in the long run. Here's why:
- It can save you money if you negotiate a discount for paying early or on time.
- It saves and builds your reputation.
- It encourages your suppliers and vendors to recommend your business and give you excellent service.
- It gives you a payment cushion for when you REALLY need to delay payment, thanks to the goodwill you've built up.
And here's something else to consider: If you can't pay new invoices as they come due, even after you've trimmed your expenses, adjusted your strategy, and put some new marketing in place, you have to ask yourself whether your business is viable in the long run. Okay, end of annoying post.
In a later post I'll talk about what to do if you have to pay a bill late, which may be more applicable in this environment.
Dovetailing with last week's post on cutting costs by doing everything short of layoffs -- such as cutting salaries, shortening the work week, and eliminating nonessential benefits -- is the idea of putting employees on furlough. However, according to a recent article in the New York Times last week, furloughs can end up costing more money than they save, because you still have to pay out benefits to furloughed employees and overhead on their work space and equipment. Plus, productivity and morale both suffer. Think twice, and read this article, before you try a temporary furlough.
For some businesses, laying off employees is the only realistic way to cut expenses low enough. But there are lots of ways to reduce the amount of money flowing out of your business. If you get creative, you might be able to hang on to your employees long enough to outlast the downturn. Here are some ideas:
- Negotiate lower prices. In an economic downturn, you'll be surprised at how many suppliers will lower their prices to keep your business, if you just ask.
- Ask creditors to write off a portion of what you owe. If a creditor knows your business is struggling to keep its doors open, it may be willing to accept 50 to 70 cents on the dollar for your accounts payable.
- Renegotiate your lease. If your lease will be up for renewal soon, chances are good that, if pushed, your landlord will give you a better deal.
- Sublet unneeded space. List your vacancy online and canvass your area for a subtenant -- maybe a small business that can't afford space of its own any longer.
- Stop paying for equipment you don't need. If you are leasing equipment you don't need, ask the leasing company to renegotiate payments or cancel the lease in exchange for taking back the equipment. If you own equipment outright, or are still paying on it, sell everything you don't need.
- Eliminate discretionary spending. If you planned to paint your building or buy new equipment, don't, even if you've made a contractual commitment to spend money -- you can negotiate your way out of most contracts, sometimes for a small fee.
- Cut employee benefits. When times are tough, it's better to cut benefits such as dental plans, health club memberships, and wellness plans before laying off people. But try to hang on to your employees' health insurance plan (if you offer one).
- Cut salaries by a small percentage. When jobs are scarce, it's usually possible to cut pay (including your own) by a small percentage and not lose employees.
- Cut the work week. Another way to save jobs is to go to a four-day work week (you'll save 20% of your payroll), or at least put a freeze on overtime hours.
See Riva Richmond's article in Business Week for some heartening examples of how these cost-cutting measures have been put to work.
To learn more about helping your business survive the challenges of recession, see Save Your Small Business, by Ralph Warner and Bethany Laurence (Nolo).
If you're paying the same amount for supplies, inventory, and services for your business as you were in 2008, you're throwing your money away. Especially if you can offer cash on delivery or fast payment, you should be able to renegotiate some of your deals for less. Check out this NYT article by Paul Brown; it has some good ideas for negotiating prices down.
In particular, if there's a glut of vacant space in your area, your landlord may be willing to rethink your lease -- even if it's a long-term lease. If you can show your landlord that without a reduction in rent, your business isn't likely to survive, you might have luck -- no landlord wants to lose a tenant in this market. One way to negotiate is to ask for significantly lower rent for the next year, with a built-in increase when things return to normal.
For information, advice and strategies you need to negotiate with a landlord, see Negotiate the Best Lease for Your Business, by Janet Portman and Fred Steingold (Nolo).